Spend, Save and Invest Smartly
In today’s fast moving World you change jobs at least once every two years. Gone are the days when you stuck to a single job and it gave you a lifelong pension. You have to plan for your retirement years right now. Every day you hesitate means a lesser pension for your retirement years. For many years pension plans invested in fixed income to give you guaranteed returns. A defensive approach of whatever happens money should not be lost was followed. You got a return which was no match for inflation. In order to beat inflation pension plans turned more adventurous and invested in equity. Unit linked pension plans were born which gave a higher return but with higher risk.
The unit linked pension plan invests your money (premiums paid) in equity (stock markets) after deducting charges and expenses. Your money accumulates or reduces depending on the stock market movements over time. A compulsory health or a life cover is provided in the unit linked pension plan.
Lock in: There is a compulsory lock in for 5 years. (You cannot touch your money for a period of 5 years).
Bonus: After you hold the policy for 10 years you get loyalty additions or bonuses.
Maturity: On maturity of the unit linked pension plan (at your retirement age) 1/3rd of the money accumulated in the policy (lump sum) is paid to you. The remaining amount is used to purchase an annuity policy (Generally an immediate annuity with the same insurer).Purchase of an annuity policy is compulsory. The immediate annuity then gives you pension benefits for as long as you live or for a fixed time period depending on the type of policy. You can buy the annuity policy from the same Insurer you purchased the pension plan from. It is compulsory for the Insurer to provide you with the annuity. This frees you from any hassles and you would also get loyalty benefits from the Insurer.
These polices have a premium allocation charge (about 4% of the premiums you pay) for 5 years and then the charges reduce to 2.25% of the premiums you pay for the next 10 years. They have a Fund Management fee of about 1.35% of your corpus (Total amount invested in equity (stock markets).The fund manager charges this amount to manage your money in the stock market. About 0.25% of your premium is charged as policy administration fees for the first 5 years which then reduces to 0.05% for the next 10 years. You also have mortality charges as these policies give you a life cover.
You get a guaranteed maturity benefit if you (policyholder) survive the term of the plan. This is 101% of all the premiums you have paid. You get either 101% of all the premiums you have paid or the fund value (Corpus invested in stock markets) whichever is higher. If you (policy holder) die before the plan matures your nominee gets 105% of all the premiums you have paid or the fund value (Corpus invested in stock markets) whichever is higher.
Unit linked pension plans allow you a choice in equity (how much is invested in equity). You could choose to invest anywhere between 25-100% in equity. The remaining would be in debt (fixed income securities). If you like to take risks you can opt for as high as 75% in equity especially when you are young (say 30 years) and just starting your career. If you are risk averse (do not like to take risks) you can opt for as less as 25% in equity and the remaining in fixed income (up to 75%). If you are near retirement (over 50 years) then you can take the conservative option.
You get a deduction under Section 80C and Section 80 CCC combined up to INR 1.5 Lakhs per year from your taxable salary on the payment made towards the unit linked pension plan. The 1/3rd of the amount you get as a lump sum on maturity in a unit linked pension plan is tax free. You have to compulsorily take an immediate annuity from the same insurer with the remaining 2/3rd amount. The annuity amount (pension you receive) from the immediate annuity is added to your taxable salary and taxed as per the income tax slab you fall under.
If you surrender the policy before 5 years you will have to pay a maximum surrender charge of INR 6000 .You will get proceeds of the fund only after 5 years of taking the policy(after the lock in expires). Even if you surrender the policy you will have to compulsorily take an annuity policy from the same insurer. This could be 2/3rd of the corpus you have got from the policy. This is done to discourage you from surrendering the policy. You need to carefully identify your needs before taking unit linked pension plans.